German Bund Yields Fall on Middle East Optimism

Germany’s 10-year Bund yield hovered around 3.12% on Thursday, down more than 8 basis points this week as optimism over a potential Middle East diplomatic breakthrough boosted expectations of lower oil prices and reduced pressure on central banks to tighten policy further. Iran said it had reached an agreement with Oman on a proposed shipping route through the Strait of Hormuz, raising hopes for the resumption of energy flows, although a broader US-Iran deal remains uncertain. President Donald Trump said negotiations were ongoing and that he would “see what happens.” Lower energy prices have strengthened expectations that the European Central Bank will maintain a gradual approach to policy tightening, with markets pricing in one additional rate hike by year-end and a smaller probability of a second. Meanwhile, German factory orders rose more than expected in June, adding to evidence that Europe’s largest economy may finally be gaining momentum.

Germany's 10-year Bund yield fell below 3.1%, its lowest level since July 15, as a sharp decline in oil prices eased inflation concerns. Crude has fallen about 10% this week amid growing optimism that the US and Iran could reach a deal to end their five-month conflict and reopen the Strait of Hormuz. US President Donald Trump said the two countries were engaged in "very good discussions," raising hopes for a resolution to the conflict, which has severely disrupted Middle Eastern energy supplies. The prospect of improved oil flows has weighed on crude prices, reducing fears of renewed inflationary pressures and weaker economic growth. The decline in energy prices has also reinforced expectations that the European Central Bank will take a more gradual approach to policy tightening. Markets now fully price in just one more ECB rate hike by year-end, with around a 40% chance of a second. The ECB raised rates in June but left policy unchanged at its latest meeting.

Germany's 10-year Bund yield eased toward 3.1%, tracking a sharp decline in oil prices as optimism grew that the US and Iran could reach a deal to end the conflict and reopen the Strait of Hormuz. Qatar said mediators were making progress in negotiations, while US Treasury Secretary Scott Bessent said an agreement could be reached as early as Tuesday or Wednesday. Despite the decline in yields, stronger-than-expected eurozone data continued to support expectations that the European Central Bank could raise interest rates at its September meeting. The eurozone economy expanded 0.4% in the second quarter, twice the expected pace and the strongest growth since early 2025, while annual inflation accelerated to 2.9% in July, with core and services inflation also picking up.